Q4 2021 Root Inc Earnings Call

Ladies and gentlemen, thank you for standing by your conference call will begin momentarily again. Thank you for standing by your conference caution begin momentarily. Thank you.

[music].

Thank you for standing by and welcome to the fourth quarter of 2021 earnings Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question at that time. Please press Star then one on your Touchtone telephone.

As a reminder, today's conference call is being recorded.

I would now like to turn the conference or to your host Ms. Christine Patrick Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today Brutus hosting this call to discuss its fourth quarter 2021 earnings results participating on today's call are Alex Tim co founder and CEO and Dan <unk>.

Synthol, Chief operating Officer, Chief revenue Officer, and Chief Financial Officer.

During the question and answer portion of the call. Our presenters will be joined by Matt The knock the Port Chief Technology Officer, and Frank Palmer, Chief Insurance Officer.

Last evening brewed issued a shareholder letter announcing its financial results. While this call will reflect items within that document for more complete information about our financial performance. We also encourage you to read our 2021 Form 10-K before we begin I want to remind you that matters discussed on today's call will include forward looking statements related to our operating.

Performance financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information as a result of new developments that may occur.

We're looking statements are subject to various risks uncertainties and other factors that could cause our actual results to differ materially from those expected and described today.

In addition, we are subject to a number of risks that may significantly impact our business and financial results for a more detailed description of our risk factors. Once again. Please review our Form 10-K , where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements as well as our shareholder letter released last evening.

<unk> of this conference call will be available on our website under the Investor Relations section I would like to also remind you that during the call. We are discussing some non-GAAP measures in talking about routes performance you can find the reconciliation of those historic measures to the nearest comparable GAAP measures in our shareholder letter released last evening in our filings with the SEC each of which will.

Be posted on our website at IR Dot joined route Dot Com I will now turn the call over to Alex Tim roots founder and CEO . Thanks.

Thanks, Christine I am going to get right to it 2021 was a challenging year as inflation pushed losses to new levels and digital marketing spend became less efficient however, because of our technology and data advantage. We were able to identify these trends early and take Swift action our ability to respond quickly as reflected in our fourth quarter results were a loss ratio has been.

Stable since the initial impact of inflation hit earlier in the year, while industry trend continued to rise.

Also reduced marketing spend another 65% in the fourth quarter cutting our operating loss roughly in half since the second quarter.

During the quarter, we continued to make progress on strengthening our underwriting and building our embedded product.

We've made substantial progress in our partnership with Carvana through open collaboration the quality and effectiveness of what we've been able to build in less than six months has surpassed expectations on both sides.

After rolling out the first version of our product in 12 States. We've made improvements to the customer experience and are focused on driving adoption. We continue to add new states to the embedded footprint every week.

As the initial results have been very promising Carvana has increased our share of traffic months ahead of schedule.

We have a strong roadmap to continue to drive increased bind rates as we build the second version of our product we will explore how telematics can be used to inform pricing underwriting and the customer experience.

We are also building a brokerage offering to serve customers in states, where <unk> currently does not write business.

While it's still early the metrics around attach rate loss ratio and retention look extremely positive.

We expect that Carvana customers will represent a material percentage of new writings in Q1 and continue to build throughout the year on top of our successes with embedded insurance, we're tightening our underwriting standards and a state by state approach to further drive profitability. This work is critical to the efficacy of the data science models and <unk>.

Their ability to drive differentiation and roots risk segmentation.

In addition, we have continued to advance our machine learning based loss in underwriting models, having built our pricing and underwriting systems on the very best technology really has been able to respond to the environmental changes quickly during the fourth quarter, we implemented rate increases and an additional five were implemented to date in the first quarter.

We have improved pricing segmentation through enhancements to make model our country wide pricing model. This model leverages routes growing dataset to expand modeled coverages improve segmentation and better predict the lifetime value of a customer. Our UBI 4.0 model is also now active in 24 states through detailed testing of this model we have.

The material improvement in frequency to premium ratios, while simultaneously offering better prices to good drivers. This further demonstrates how the predictive power of our technology translates into measurable results taken together, we expect these actions to drive improvement in our 2022 loss ratio and bring our performance closer to our <unk>.

<unk> goal of 65% we are driving this company to profitability. The actions we took over the last quarter, we will materially improve our underwriting results. While building defensible growth, we were able to act quickly because our engineering and data science driven infrastructure allows us to collect actionable real time data analyze it quickly and.

Then implement change and that was demonstrated by our Q4 performance.

Before I turn it over to Dan I wanted to share two employee announcements.

I'm excited to report that Matt, but okta par has been promoted to chief Technology officer Mats contributions to root over the past four years is incredibly significant by more closely aligning our data science technology teams with Mad at the helm of both we can continue to unlock opportunities to build a world class data science technology stack.

We also announced that <unk> has decided to leave route you will be taking some timeframe yourself and his family I would like to thank Campbell for his contributions to building our product our teams and our processes.

I am thankful for the dedication of our team members, who are working everyday to Unbrake insurance.

Appreciate the trust of our customers and investors and with that I'll turn the call over to Dan.

Thanks, Alex our results for the fourth quarter of 2021 reflected roots ability to recognize environmental trends early and take quick action to address them.

We have line of sight to profitable unit economics, and this quarter reflects our strategic priorities inaction.

You'll find our full GAAP financial results contained in the shareholder letter, we published yesterday evening, but we wanted to give a few of the key highlights.

On the topline we grew gross written premium 9% year over year to $158 million.

Our gross earned premium increased 22% year over year to $189 million.

The top line outperformance was driven by relatively stable retention and less impact from rate increases and reduced marketing spend than anticipated.

Shifting to profitability gross accident period loss ratio was 91% for the fourth quarter inclusive of six points of severity and nine points of frequency compared to the fourth quarter of 2020.

As Alex touched on the relative stability in our loss ratio since inflation hit in the second quarter speaks to the power of our platform leveraging our technology and data architecture. We have responded quickly getting rate and underwriting changes into market.

The operating changes we have made on our path to profit were demonstrated in our bottom line.

Operating loss was $92 million, a $35 million improvement when compared with the third quarter and $80 million reduction from the second quarter. When we started taking action to reduce cash burn.

The primary driver of this reduction was a 50% reduction in sales and marketing spend in the second half of the year when compared with the first.

Our commitment to expense management has not stopped with marketing spend.

In January we made the difficult decision to reduce our workforce by approximately 20%, resulting in run rate expense savings of approximately $30 million annually.

This brings total run rate expense savings to date to roughly $48 million from our peak 2021 expense levels.

In coming quarters continued expense management actions will be evident in our cash consumption and bottom line results. These efforts in combination with closing on a new term loan facility with Blackrock in the first quarter of 2022 give us line of sight to profitable unit economics and capital to execute on the strategic.

<unk> priorities to get us there.

Turning to our outlook, we remain on the path, we set out on during the second quarter of 2021.

With the amount of uncertainty surrounding the auto insurance environment and the ongoing impact of Covid, we are providing a six month view of our expectations. We continue to expect gross written premium to reflect significant year over year declines in the first half of 2022, as we continue to take underwriting and pricing actions.

We continue to expect meaningful improvement in our operating losses in 2022.

With a further reduction in marketing costs and fixed expenses, we expect approximately 25% improvement in operating losses in the first half of 2022 compared with the first half of 2021, excluding restructuring charges of $6 million to $9 million.

Our planning to host an Investor day in New York City in September , where we will give a greater level of detail on future expectations for the business.

I would like to Echo Alex's statement that we are on our path towards driving this company to profitability.

The actions that we've taken demonstrate our thoughtfulness around deploying capital and our improving our bottom line.

But we are not finished.

Our near term goals are very clear continuing to capitalize on our technology advantage strengthen our underwriting foundation and building out our embedded product with Carvana.

We are excited about the opportunities before us and appreciate your continued support.

With that Alex Frank Matt and I look forward to your questions.

Thank you.

Again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone again to ask a question. Please press Star then one.

Our first question comes from Elyse Greenspan of Wells Fargo. Your line is open.

Hi, Thanks, Good morning, Mike.

My first question and let our last night you guys did mention that there was I think some frequency benefit.

Here I was just hoping you could give us more color on that and then did you see a frequency benefit continue into the start of 2022, just given the.

<unk>.

In January .

Thanks.

Hello This is Frank.

A couple of comments on that as we talk about the frequency improvements from UBI floor.

We did see some driving reductions in due to the AMA column, but those were when we talk about that from a from our UBI for modeling. It wasn't just the omicron because we saw some of those decreases even before earlier in the summer as we rolled out our new model that model is its not just frequency frequency.

To earn premium metric, which shows that the new models are driving more profitable business not just lower claim counts.

Okay and then my.

Oh, sorry go ahead.

Hi, Yes. This is Matt blocks, where I just wanted to chime in and mentioned that we typically see every year around this time going into the end of December and then into the winter months, the seasonal trend and frequency and Thats, what we were alluding to in the shareholder letter a decrease in miles driven which was confirmed in our telematics data.

Implied a decrease in frequency.

Okay. Thanks, that's helpful. And then my second question was on the Carvana relationship.

And they are prepared remarks, Alex you mentioned that you thought there would be a material percentage of new writings on that relationship with the Q1 any more detail you can just give in terms of premium expected there and how we should think about the growth.

From that relationship throughout 2020 tailwind even beyond.

Yes. Thank you for that question it's.

We're still in the early days on Carvana, we're seeing really.

Exciting growth through that channel and we are seeing a material portion to day of our new writings coming through that channel.

And we have lots of plans to continue to scale, both the state footprint as well as continue to drive up the attach rate with customers through.

The version two of our product that will be more embedded.

Into the Carvana flow than what currently stands so Dan do you want to comment on expectations.

Thank.

Elyse good morning.

The only thing I'd add to what Alex said is yes.

A lot of people talk about partnerships that can be an overused word I think one of the things. We're most excited about in the six months since we agreed to our partnership with Carvana and their investment in route.

Is how quickly the teams have come together. This is really a very special and unique partnership we've seen like minded cultures, we've seen laser focus on the customer that we both share really really open collaboration between the companies and simply put thats driving faster development of the embedded product.

Stay tuned for what's to come but we're very excited about it.

Okay. Thank you.

Thank you. Our next question comes from Josh <unk> of Cantor Fitzgerald. Your line is open.

Yes, hi, Thanks for taking my question I wanted to dive into your policies in force, which grew year over year, but yes, <unk> what helped you still game users this quarter.

Yes, I think Thats a good question for Dan on policies enforcing growth, yes, I think look we were pleased with the performance in the fourth quarter.

Particularly seen retention at better levels than we anticipated.

As well as some of the hangover of the marketing that we had invested in earlier in the year that said, we do we are continuing to guide with language that we used in the last quarter about significant year over year declines in growth as we go forward for the first half of the year you know the first half of 2010.

One was a really significant growth period for us.

And as we lap that we want to remain really laser focused in this environment on our pricing and underwriting.

Really focused on the foundation of the business, what we've talked about and it's reflected in our results from the fourth quarter that we're having success. The actions that we took in the middle of 2021, leveraging the technology that we have in place to drive a really granular focus on pricing and underwriting and frankly to move faster and youre going to start.

To see that show up in the results as you did in the fourth quarter on the bottom line at the same time, we're focused on differentiated more efficient customer acquisition channels and for us that starts with Carvana. So it's less about growth this month and month and its more as Alex said earlier about building towards that on that path to profitability.

And that's what we're excited that's the journey we're on.

Great. That's helpful and following along that line of thought with Carvana, becoming a material part of the writing starting in <unk> do you also expect it to start having a positive impact on your loss ratio.

Wayne.

All year.

I think Matt <unk>.

<unk> can talk about what we're seeing through that channel to date, it's still very early days, but we are seeing positive signs Matt do you want to give some detail I do want to underscore. The fact that it's very early days and the losses are still developing but we are seeing encouraging sides signs not just from the customer mix characteristics and the retention data that we're seeing but also early.

Caters a frequency and loss ratio, it's important to note that anytime you starting to channel you will feel a new business impact from that channel, but when we compare and control for that fact, the early signs are very encouraging.

Great. Thank you very much.

Thanks. Thank you. Our next question comes from Matt <unk> of JMP. Your line is open.

Hey, Thanks, good morning.

Taking your kind of comments on pricing actions, what you've seen with frequency.

And then also the <unk>.

Commentary in the letter about being able to kind of see loss trends more quickly do your technology and react to them.

Yes.

Do you think it's safe to say you knowing what you know today that we have seen the worst of the loss ratio I mean, I heard your comments about improvement in the loss ratio in 'twenty, two but given the stability Q4 versus Q3 do you think we peaked out or are there reasons to believe that we could take higher before seeing that improvement over the course of the year.

Okay.

I think we've done a lot of work and the teams have done really an amazing job at getting.

Both the underwriting our underwriting function.

It's pretty drastically as well as pushing out.

A ton of pricing improvements throughout all of our markets and so we've done really a historic amount of work over the last six months to really control for that and we're really proud of the team and the hard work they've put in there I'm going to pass it over to Frank who can talk a little bit more about how we see the future.

Yes, so it's fun to talk about the future.

Break your question up into kind of there is loss trend and then theres loss ratio trends we.

We do think that loss trends are still high.

We look at the macroeconomic factors inflation is still up.

Used car prices are still up and we expect that a lot of those.

Macro economic impacts.

Impacts to still remain high and to have relatively high high loss trends throughout the rest of this year at least throughout the rest of this year now than there is loss ratio trend now we think that we managed to take actions.

Very early on as we started to see these loss trends come up and so our rate actions our underwriting actions.

Should help bring that loss ratio down or at least keep.

Keep pace with that trend and so while we might not have seen the peak in loss trends.

Your industry wide macroeconomic loss trends, we do think that we've probably seen a peak in the loss ratio trend.

Great. That's very helpful. And then one other if I could.

Kind of a high level question, but I think one that people might find permanent given kind of some of the changes taking place.

What does it look like two to three years from now and specifically I'm kind of asking around you know kind of distribution makeup of the company.

And path to profitability.

This is Alex thanks for that question yet.

What we see right now and where we're still laser focused we have not lost belief at all in really the core underlying opportunity here and we still think that when you look at the 260 over 260 billion auto insurance market that we have developed really differentiated technology, both in our ability to move quickly.

And develop things like Carvana, an even broader embedded platform, where because of our technology, we can deliver one click.

We can deliver one click experiences.

And at the same time, we can leverage our data to actually materially improve the underlying unit economics, and so I think in the future youre going to see we do believe embedded is a gigantic opportunity. We think that there is going to be a very large shift we think it builds better consumer experiences and we think that we're at the tip of that.

And we're going to continue to expand that product and distribution line.

We also still believe in our direct channel.

We think that we can build better consumer experiences through.

Through our technology and that's what we're going to continue to do and then with that you should expect material improvements to profitability, which is the companys track record, we have consistently improved loss ratio over the years and yes. We saw some inflation last year, but we believe we've now really acted quickly decisively and aggressively to get that back.

Under control.

Great. Thanks for the answers I appreciate it.

Thanks.

Thank you. Our next question comes from Michael Phillips with Morgan Stanley . Your line is open.

Hi, you actually if model on <unk> on for Mike.

Just have one quick question somewhat touching on the last point that you guys made so as you think about your various distribution channels, how do you rank.

Slash prioritize IAA channel and I think you touched on and do things that will focus on <unk>, but I'm just trying to figure out how do you balance the various distribution channels, including partnership and not <unk>.

As Jim alluded to somewhat breaking into the IAA channel as well.

And we do have.

Investments throughout multiple distribution channels, including our independent agency channel, which is still alive and we are getting policies through that channel today.

However, what we have seen and what we have observed over the last six months with really the.

With the Carvana partnership and the success of the embedded product.

Really surpassed any of our expectations and so what we in the immediate future I really focused on is we think it's very prudent to focus our resources there to continue to drive.

That growth channel and we also believe that that growth channel.

Actually can create a moat around our business because there is it is differentiated access to customers.

Where we can uniquely services customers in the moment that they actually have the need and so we think because of that that's really where we're focused right. Now of course as we progress we believe that theres lots of other ways to talk to customers too.

We will be over time over a longer period of time.

<unk> to incubate other distribution channels, but right now the focus is carvana.

Great. Thanks, and just a quick question on your rate increases so you've been taking a significant significantly increases I think you guys alluded to in your shareholder letter, 14% since the beginning of 2021, which somewhat seems above the industry average obviously people have been taken <unk> four.

Inflationary pressures, but I'm just trying to figure out what is that a function of that.

Problem I know, what you guys entering new states you Werent allowed to use your telematic pricing. So you have to rely on other previously filed data from other insurers alright.

Is it just like a function of your telematics pricing and Youre adjusting for it there.

Is it a different.

And inflationary environment as well I'm, just trying to parse out what is the difference that what it seems above.

Industry average rate taken throughout the past.

A few months.

Sure. This is Frank I can I can take that great question.

Think that a lot of that rate increase action over industry average is.

The inflationary pressures alright, so quarter one the industry.

Quarter, one of last year, the industry had good loss results.

Quarter, two is starting to accelerate away and we saw some of that loss cost increases some of the greatest loss cost increases in the last 20 years maybe.

Quarter to quarter, three and quarter four now we believe that was able to identify that earlier bulk with our using our technology the granular level at which we segment segment level that we look at our loss cost data as well as our UBI, giving us more driving information around customer driving patterns and how those are increasing both on a frequency and severity basis.

And so we think we were able to recognize that industry loss cost trends earlier and start getting those rate increases and underwriting actions in the market faster than what other competitors. So so if you go back to quarter two quarter. Three I think we would have expected that we would have higher than average rate increases mostly because we recognized.

The loss increases that are impacting us in the industry, but just could act sooner than many of our competitors.

Okay. Thank you I appreciate it.

Yeah.

Thank you. Our next question comes from <unk> of Jefferies. Your line is open.

Hey, Good morning. This is Andrew on for your own.

So it sounds like retention rates were a bit stronger this quarter, but at the same time, so filing for rate increases I was hoping you could help us think about the impact on retained Pip and on that new Pip growth from here just given the rating actions.

Yes, sure this is Matt that encore.

Like you said going into Q4 retention was a bit better than we expected we have incorporated that into our forward looking forecast.

That's gone out of our way as we've improved our underwriting and pricing capabilities to pay close attention to the customer experience and that means preserving the rates they get a new business as they renew into their future terms. So rate disruption is top of mind and mitigating it for the benefit of the customer is a priority for us so while we do.

Spec the rate increases going forward in the quarters to come to impact retention, we think it won't impact it the same way it has in the past and.

That's incorporated into our shareholder letter and our forward looking forecast.

Great. Thank you and then.

So it sounds like loss trends still expected to be high throughout the rest of the year, but loss ratio trend.

Has peaked.

Just given.

The current inflationary environment does routes still need another level or another round of rate increases.

Yes. This is Frank I'd say that we're still in.

The middle of that first round of rate increases and then we are certainly monitoring and we will see kind of how those loss trends increase.

You don't have to take all of the rate.

In one month January and February and so we're continuing to take rate and we expect to continue to do that for the next couple of months and then we will see and we're past we're positioned to be able to take further rate than the rest of this year, if we need to.

Great. Thank you.

Thank you. Our next question comes from Mark Hughes of choice. Your line is open.

Yes. Thank you good morning.

Your level of sales and marketing spend should it go from the level you had in Q4.

Good morning, Mark This is Dan.

We are on a trajectory of sales and marketing that.

You talked about back on the Q2 call last summer where.

We did a reset around our direct marketing strategy, obviously focused on building out the differentiated embedded insurance products, starting with Carvana and Thats continued we continue to cut back sales and marketing through the third and fourth quarters last year and are continuing to do so as we look at the first half of this year now.

We are continuing to test as Matt talked about earlier.

We leverage the data that we have the customer segmentation information that we have.

We have a very strong new chief marketing officer, BC, silver, who is bringing some differentiated strategies to our direct marketing we were thrilled to hire him from green dot in a lot of other prior experience at Procter and Gamble on Clorox brands than otherwise may.

He has been a great addition is a leader to the team.

Again, we look forward to seeing what he develops strategically that said in the pricing and underwriting environment that Frank and Matt described where we are continuing to take rate and deal with the worst auto insurance inflation and for decades, that's going to necessarily result in lower marketing, we think that is the prudent strategy.

And the smart thing to do right now and then is the strategies that we've put in place that Frank and Mark Matt articulated and that we talked about in our shareholder letter dating back over the last several quarters that are showing up in our results as those strategies are in place then we can return to a greater focus on direct marketing.

Understood.

$25 million level is that a reasonable run rate when we think about the first six months.

2022.

If you are saying $25 million for the first half of the year I actually think Thats high again in this environment.

Where we are able to reduce down our direct marketing spend and focus it on the states and customer segments that matter and until we get the rate increase was in place I think $25 million over a six month period is higher then we will end up.

And then I think.

You gave a lot of details on this.

Could you talk generally about your the resources the cash on hand kind of the.

Cash burn just.

A general sense of.

Of your current position.

Okay.

Yeah. Thanks, Thanks, again, Mark I'll take that one.

I think we are a fundamentally stronger company with a sound strategy and a stronger balance sheet today.

Then we have been in the past.

That's reflected in the actions that we've taken around sales and marketing that I just described.

Actions from a fixed expense standpoint.

And really from a focus and prioritization within the business. We are just running really strongly at the key priorities, Alex articulated around our pricing and underwriting focus what we call. One play this play because it is really the critical play in the foundation and then building out the differentiated customer.

Acquisition strategy, so that sets us up to have line of sight to profitable unit economics, as we move forward and then capital to execute on our strategic priorities to get us there.

I think the other thing that I would add is the support from Blackrock.

That occurred back in January where we closed the facility.

Sends a very powerful message.

To have Blackrock support us with a five year $300 million debt facility.

Really really exciting for us so.

Where are we where we sat at year end from a holdco cash position, which we felt good about as well as the cash and investments position has only been strengthened by the $300 million facility close with Blackrock in January .

Thank you.

Thank you. Our next question comes from David Mann of Evercore ISI. Your line is open.

Thank you.

I just had a question just on the outlook.

So if I if I just think that you think there's going to be a 25% improvement on the operating loss in the first half.

Rob implies about $100 million of losses operating losses a quarter.

With $92 million this quarter.

You have some expenses that will come on from some of the outflows you took earlier this year.

On Guam in response to a question earlier, the submarket loans might even come down further.

So yes, you guys have amounted to $9 of operating losses this quarter.

Why do you expect that to.

Alright.

So around $100 million a quarter in the first half overall.

I think.

We caution you David first of all good morning, nice to speak with you again I would caution you from looking at the run rate of the fourth quarter losses, given the seasonality in the business as well as the continued inflationary impact that Frank described earlier.

The factors to just look at one quarter and then extrapolate that into performance for the following year I think if you look at our sales and marketing levels in the fourth quarter. They were quite low that is seasonally typically would be our lowest direct marketing quarter of the year to begin with and it was low consistent with that so.

We expect that to continue I think for US we as I mentioned earlier, we are running more efficiently today than we have in the past we are focused on our core strategic priorities. That's going to result in about a 25% operating loss improvement and we're trying to smooth out the seasonality that you might see in one quarter or another and.

Frankly, just focus on executing on our plan I think what youre seeing from us and the results of that.

We announced in the fourth quarter.

The plan and focus that we have going forward is it's less about one quarter or what have you. It's really about the strategy that we fundamentally believe and we think as Matt said, we are moving faster than others in the marketplace, you're seeing the impact of our technology and our granular focus showing up in the results.

And that's our focus and we're going to continue to do that as a team.

And look forward to continuing to talk to all of you on that journey.

Got it okay. So I guess your seasonality must be a little bit different I guess some of your peers are have a little bit favorable seasonality in <unk> versus <unk>.

That's fair.

Okay.

Identify.

As mentioned in the letter.

Alex just around the.

Carvana relationship you talked about some of the metrics around loss ratio attachment attach rate retention looking positive on some of that business through Carvana could you just saw what those metrics are announced.

And I am specifically focused on what the conversion ratio is for the Carvana relationship.

How that's looking.

Just to get a sense for.

As you guys expand how to think about that.

Yes. This is Dan you're right we've talked about it we're really excited about where carvana is going again, I think it's all developing faster than we anticipated and better than we anticipated, but it is still early days and Matt talked about it earlier.

We're working really really well as partners and learning from the early signs that we see in the data and we'll look forward to sharing more in the quarters ahead, but the leading indicators that we do see support better unit economics coming from the channel and a better customer experience and now it's about continuing to develop the product ad.

More states learn from the testing refine and grow the channel.

Thank you.

Okay.

Thank you. Our next question comes from Brian Meredith UBS. Your line is open.

Yes. Thanks, a couple of them here first just curious Dan I think you mentioned that the loss ratio had 6% severity in it as a little surprised at that number given that most of your competition in most of the personal auto carriers had double digit severity in the quarter is there something unique about route that makes you have lower severity than the <unk>.

Petition and is that what you're assuming from a pricing perspective, 6% right now.

That was I guess assume built into your reserving for the quarter as well.

Hi, This is Frank I would say that when you think about the pricing right to your pricing question.

We look at frequency and severity in overall loss trends not just the severity. So I do think that on.

On an annual basis.

Year over year or quarter over quarter, you might see higher than than.

6% overall, we're expecting probably higher than 6% overall.

Loss trends.

And I will say too with our claims functionality, particularly.

All of our claims systems are in house and so when we see things like used car price increase we can very easily and quickly actually mitigate a lot of that by making sure that we're totally in fewer vehicles and beginning to actually move more into repairs and so we were able to make that shift actually.

Real time, because we have a data science model that effectively assigns a threshold that allows us to basically decide whether or not we repair a vehicle or total of vehicle and we can do that honestly on a day by day basis, and so as we've seen severity increased.

<unk> been able to actually change that.

Logic on our on our claims handling which is we believe very unique in the industry.

Great. Thanks, and then second question.

Just quickly back on cash burn.

Just curious as I look at kind of near term cash burn given the big drop youre going to see in written premium in the first half of the year is that all it all kind of maybe increased cash burn a little bit in the near term ultimately obviously to improve as the book.

Groups.

Yes, we don't anticipate that drop off in new business too.

Materially increase cash burn in fact, we think the opposite will occur because new business typically with a higher first term loss ratio causes causes a bit of a.

Strain on on cash burn and so we've cut our operating loss.

Roughly in half in the last six months or so.

And we think that that's going to continue.

Great Great and then if I could just one quick last one the carvana relationship I'm, just curious is that a telematics product.

So what we've done in the.

In the first version of Carvana is we've really prioritized getting a product out into the market into consumers' hands and moving quickly.

And Thats the way, we like to develop products that route as we really leverage our engineering abilities to ship product very quickly very very frequently and so every week, we are making improvements to that to that.

That product flow currently we are not using telematics in the Carvana flow. However, we do have plans to and.

And we think that there is a lot of really interesting opportunities here, particularly given that they have the vehicle really in their possession.

Which allows us to get closer to vehicle technology as well, while theyre in the reconditioning centers and so.

That is certainly on our product roadmap and we will be iterating quickly and inform you guys as we've all those new products out.

Thanks I appreciate it.

Thank you. Our next question comes from Tracy Dengue.

Barclays. Your line is open.

Good morning, I'm trying to rectify your E rate increase action in the fourth quarter and your average premium so I see your premiums per policy only increased 2% in the fourth quarter versus the third quarter. So should I expect it just a time lag thing it will take more time to recognize some of the pricing actions.

You've taken in your average premium.

Yes. This is Jeremy thanks, Great question.

Yeah.

Hi, Dan go ahead, Frank I was going to say, yes, you can say that one yes, certainly earned premium will take longer to earn in but I would also say that with some of our marketing actions and the slowing down we've also had mix shifts.

From new to renewal and others. So just looking at the average premium I think is hard to reconcile between filed rate increase.

Average earned premium just because of there are mix shifts. So you could get a mix shift towards a lower earned premium, but a better loss ratio.

Going from new to renewal also.

Okay, and then just staying on rate actions I was actually struck by 56, 4% rate request in Nevada.

Posing a historic adjustment and to better reflect loss trend.

Trying to fix an expense load how do you think that will respond to that and should we expect any other historically.

Our SEC filings.

This is this is Alex and Thats a good question.

We have one we always are working with with regulators and we are continuing to work with regulators to our state filing process. I think it's important to note that now that the industry has sort of come along and realized that this loss trend is real is that we are not really alone in requesting.

Large rate increases and so.

I think that that that that has helped us considerably and we have been able to and I think the track record shows now.

Actually receive approval of our rate increases we've gotten many very large rate increases and changes in market over the last six months and we think that that's going to continue.

The other thing Thats really important for us and why we're able to do this is because we have automated almost all of the actuarial.

Impact analyses that we need to show in the data that we need to support those rate filing increases and so so long as we can show that these are actuarially justified rates, which they are we have all of the belief in the world that will be able to get the rate increases as we've shown in the past.

Okay.

And if I could just sneak something else and you've mentioned nine to frequency and claim severity in the fourth quarter, if I compare that to last quarter. You also said nine points of frequency and.

The severity.

Seems like frequency flat not better so when you talk about frequency being better.

<unk> perspective.

And it also seems like severity is getting bigger what is really driving that given your other comments that inflation.

Should still impact result.

Yeah.

Yes.

The not the frequency in the shareholder letter it was really talking about the very end of Q4 going into the seasonal decline in mileage at the end of December and more specifically and into the winter months Thats what drove the decrease in frequency in the quarter overall.

Severity trends are more or less stayed flat basically natural variation quarter over quarter, we havent seen the inflationary pressures stack on top of each other quarter over quarter and that allows us to be confident in the rate filings that we're going forward with today.

Oh, okay.

My comment was more of the end of the quarter, but it was still flat nine points versus nine points for frequency.

And more.

Just variability quarter by quarter.

Six point, the severity versus eight point last quarter.

Right.

Yes.

I think thats correct youre going to see some variability when we look at year over year.

Trends in severity and frequency.

Particularly on severity it can be noisy so I would say that Thats correct and then we are seeing seasonal benefits to frequency.

Thank you.

Thank you.

Our next question comes from Ryan Tunis of Autonomous Research Your line is open.

Yes.

Thanks, Good morning.

As best you guys can tell what do you think your cash position will be at the end of 2022.

Thanks, Brian I appreciate the question Im not going to get into specifics on that you see especially given the.

The environment that we're in we're excited about is a couple of things. We're excited about the fact that over the last couple of quarters.

We have hit our stride from a strategic standpoint as.

As well as an operating standpoint, Alex talked about the significant reductions in sales and marketing expense the fixed expenses et cetera, and we're forecasting a 25% operating loss improvement year over year for the first half of the year and as I said earlier, we're really pleased that we see line of sight to profitable.

Unit economics that will help protect the cash position that we're in.

And we have capital to execute on the strategic priorities that we've laid out part of being more focused from a prioritization perspective.

Certainly allows us to benefit from the capital position that we're in and extend out to cover the priorities that we're focused on on top of that I mentioned earlier, the Blackrock facility, which has a five year $300 million facility that closed in January .

It is really really important and gives us the foundation and the support to continue to execute on our strategy for years to come.

Got it.

Then a follow up for Alex.

I mean, a lot of point guards has actually won the MVP.

You guys have actually shown you have a lot of marketing acumen and you've shown a tunnel policies will be lifetime decent.

Decent tech stack as well.

And seemingly if you were to run more of a tech late model you could do it.

A lot less G&A is there any thinking have you guys thought at all about perhaps pivoting your model and trying to monetize it in a different way or is that something you would consider.

Over the next six months or so.

If the insurance environment is still complicated.

And we think that our technology as we said before it is.

Extremely differentiated and we've seen that.

It comes to Carvana for example.

We've said there are several states that we know we don't support right now.

And what we've seen is that that's attractive business.

And that there are definitely other partners potential balance sheet partners.

Or that are interested and are leaning in to.

To potentially partner with US now what I will say is that when we're looking at those partners and when we're considering this as it is very important to us that they can maintain the customer experience that we're building and so making sure that they can leverage our technology and sufficiently provide that level of customer adoption and experience is going to be really import.

<unk>.

We have had an enterprise program in place to four.

Couple of years now and so.

Those business model changes.

And the different various business models to capitalize on our core technology assets that we have built here is definitely something that we're exploring and honestly have explored and we have.

Real real progress to show to date.

We already have for instance, too.

Major insurance carriers that we partner with.

In order to broker business. So we certainly look at that.

I think Ryan this is Dan the only thing I would add is.

The industry has taken note of our ability to leverage our technology. During this very unique environment and you can imagine that we have gotten significant communication on that because the results speak for themselves and that's only reinforced by the results we posted for the fourth quarter, we're always going to look at opportunity.

And some of the strategic choices that we have in front of us.

And again, we're excited about being at this point in the journey and some of the things that are going to develop in the quarters ahead.

Thanks.

Thank you.

Im showing no further questions at this time, ladies and gentlemen. This does conclude today's conference. Thank you all for participating you may all disconnect have a great day.

Okay.

Yes.

Yes.

Yes.

Yes.

Okay.

Please.

Okay.

Okay.

Okay.

Okay.

[music].

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[music].

Thank you for standing by and welcome to the fourth quarter of 2021 earnings conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

Ask the question at that time. Please press Star then one on your Touchtone telephone.

As a reminder, today's conference call is being recorded.

I would now like turn the conference or to your host Ms. Christine Patrick Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today fruit is hosting this call to discuss its fourth quarter 2021 earnings results participating on today's call are Alex Tim co founder and CEO and Dan.

Rosenthal Chief operating Officer, Chief revenue Officer, and Chief Financial Officer. During the question and answer portion of the call. Our presenters will be joined by not the knock the port Chief Technology Officer, and Frank Palmer, Chief Insurance Officer.

Last evening route issued a shareholder letter announcing its financial results. While this call will reflect items within that document for more complete information about our financial performance. We also encourage you to read our 2021 Form 10-K before we begin I want to remind you that matters discussed on today's call will include forward looking statements related to our operate.

Performance financial goals and business outlook, which are based on management's current beliefs and assumptions.

Please note that these forward looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information as a result of new developments that may occur forward looking statements are subject to various risks uncertainties and other factors that could cause our actual results to differ materially from those expected and described today.

In addition, we are subject to a number of risks that may significantly impact our business and financial results for a more detailed description of our risk factors. Once again. Please review our Form 10-K , where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements as well as our shareholder letter released last evening a replay.

This conference call will be available on our website under the Investor Relations section I would like to also remind you that during the call. We are discussing some non-GAAP measures in talking about routes performance you can find the reconciliation of those historic measures to the nearest comparable GAAP measures in our shareholder letter released last evening in our filings with the SEC each of which will be.

Posted on our website at IR Dot joined route Dot Com I will now turn the call over to Alex Tim routes founder and CEO .

Thanks, Christine I'm going to get right to it 2021 was a challenging year as inflation question losses to new levels and digital marketing spend became less efficient however, because of our technology and data advantage. We were able to identify these trends early and take Swift action our ability to respond quickly as reflected in our fourth quarter results were a loss ratio is.

Stable since the initial impact of inflation hit earlier in the year, while industry trend continued to rise. We also reduced marketing spend another 65% in the fourth quarter cutting our operating loss roughly in half since the second quarter.

During the quarter, we continue to make progress on strengthening our underwriting and building our embedded product. We've made substantial progress in our partnership with Carvana through open collaboration the quality and effectiveness of what we've been able to build in less than six months has surpassed expectations on both sides. After rolling out the first version of our product in 12 states.

We've made improvements to the customer experience and are focused on driving adoption. We continue to add new states to the embedded footprint every week.

Initial results have been very promising Carvana has increased our share of traffic months ahead of schedule.

We have a strong roadmap to continue to drive increased buying rates as we build the second version of our product. We will explore how telematics can be used to inform pricing underwriting and the customer experience. We are also building a brokerage offering to serve customers in states, where <unk> currently does not write business.

While it's still early the metrics around attach rate loss ratio and retention look extremely positive.

We expect that Carvana customers will represent a material percentage of new writings in Q1 and continue to build throughout the year on top of our successes with embedded insurance, we are tightening our underwriting standards in a state by state approach to further drive profitability. This work is critical to the efficacy of the data science models and <unk>.

Our ability to drive differentiation and roots risk segmentation.

In addition, we have continued to advance our machine learning based loss in underwriting models, having built our pricing and underwriting systems on the very best technology, who has been able to respond to the environmental changes quickly during the fourth quarter, we implemented rate increases and an additional five were implemented to date in the first quarter.

We have improved pricing segmentation through enhancements to make model our country wide pricing model. This model leverages routes growing dataset to expand modeled coverages improve segmentation and better predict the lifetime value of a customer. Our UBI 4.0 model is also now active in 24 states through detailed testing of this model we have experience.

The material improvement in frequency to premium ratios, while simultaneously offering better prices to good drivers. This further demonstrates how the predictive power of our technology translates into measurable results taken together, we expect these actions to drive improvement in our 2022 loss ratio and bring our performance closer to our <unk>.

<unk> goal of 65% we are driving this company to profitability. The actions we took over the last quarter, we will materially improve our underwriting results. While building defensible growth, we were able to act quickly because our engineering and data science driven infrastructure allows us to collect actionable real time data analyze it quickly and then.

Implement change and that was demonstrated by our Q4 performance.

Before I turn it over to Dan I wanted to share two employee announcements I'm excited to report that Matt, but <unk> has been promoted to chief Technology Officer, Matt contributions to root over the past four years is incredibly significant by more closely aligning our data science technology teams with Matt at the helm of both we can continue to unlock.

<unk> to build a world class data science technology stack.

We also announced that <unk> has decided to leave route he will be taking some timeframe south and his family I would like to thank him for his contributions to building our product our teams and our processes.

I am thankful for the dedication of our team members, who are working everyday to Unbrake insurance.

I appreciate the trust of our customers and investors and with that I'll turn the call over to Dan.

Thanks, Alex our results for the fourth quarter of 2021 reflected roots ability to recognize environmental trends early and take quick action to address them.

We have line of sight to profitable unit economics, and this quarter reflects our strategic priorities and action you.

You will find our full GAAP financial results contained in the shareholder letter, we published yesterday evening, but we wanted to give a few of the key highlights.

On the topline we grew gross written premium 9% year over year to $158 million, our gross earned premium increased 22% year over year to $189 million.

The top line outperformance was driven by relatively stable retention and less impact from rate increases and reduced marketing spend than anticipated.

Shifting to profitability gross accident period loss ratio was 91% for the fourth quarter inclusive of six points of severity and nine points of frequency compared to the fourth quarter of 2020.

As Alex touched on the relative stability in our loss ratio since inflation hit in the second quarter speaks to the power of our platform leveraging our technology and data architecture. We have responded quickly getting rate and underwriting changes into market.

The operating changes we have made on our path to profit were demonstrated in our bottom line.

Operating loss was $92 million, a $35 million improvement when compared with the third quarter and $80 million reduction from the second quarter. When we started taking action to reduce cash burn the.

The primary driver of this reduction was a 50% reduction in sales and marketing spend in the second half of the year when compared with the first.

Our commitment to expense management has not stopped with marketing spend in.

In January we made the difficult decision to reduce our workforce by approximately 20%, resulting in run rate expense savings of approximately $30 million annually.

This brings total run rate expense savings to date to roughly $48 million from our peak 2021 expense levels.

In coming quarters continued expense management actions will be evident in our cash consumption and bottomline results.

These efforts in combination with closing on a new term loan facility with Blackrock in the first quarter of 2022 give us line of sight to profitable unit economics and capital to execute on our strategic priorities to get us there.

Turning to our outlook, we remain on the path, we set out on during the second quarter of 2021.

With the amount of uncertainty surrounding the auto insurance environment and the ongoing impact of Covid, we are providing a six month view of our expectations. We continue to expect gross written premium to reflect significant year over year declines in the first half of 2022, as we continue to take underwriting and pricing actions.

We continue to expect meaningful improvement in our operating losses in 2022.

With a further reduction in marketing costs and fixed expenses, we expect approximately 25% improvement in operating losses in the first half of 2022 compared with the first half of 2021, excluding restructuring charges of $6 million to $9 million. We are planning to host an investor day in New York City and <unk>.

September where we will give a greater level of detail on future expectations for the business.

I would like to Echo Alex's statement that we are on our path towards driving this company to profitability.

The actions that we've taken demonstrate our thoughtfulness around deploying capital and our improving our bottom line.

But we are not finished.

Our near term goals are very clear continuing to capitalize on our technology advantage strengthen our underwriting foundation and building out our embedded product with Carvana.

We are excited about the opportunities before us and appreciate your continued support.

With that Alex Frank Matt and I look forward to your questions.

Thank you.

Again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone again to ask a question. Please press Star then one.

Our first question comes from Elyse Greenspan of Wells Fargo. Your line is open.

Hi, Thanks, Good morning, Mike.

My first question on <unk>.

Our last night you guys did mention that there was I think some frequency benefit and the year I was just hoping you could give us more color on that and then did you see a frequency benefit continue into the start of 2022, just given on the on the cranberry yet.

In January .

Thanks.

Hello This is Frank.

Oh.

A couple of comments on that as we talk about the frequency improvements from UBI floor.

We did see some driving reductions in due to the AMA column.

Those were when we talk about that from a from our UBI for modeling. It wasn't just the omicron because we saw some of those decreases even before earlier in the summer as we rolled out our new model that model is not just frequency frequency to earned premium metric, which shows that new models are driving more profitable business.

Not just lower claims counts.

Okay and then my.

Oh, sorry go ahead.

Hi, Yes. This is Matt I, just wanted to chime in and mentioned that we typically see every year around this time going into the end of December and into the winter months, the seasonal trend and frequency and that's what we were alluding to in the shareholder letter a decrease in miles driven which was confirmed in our telematics data.

Implied a decrease in frequency.

Okay. Thanks, that's helpful. And then my second question was on the Carvana relationship.

In their prepared remarks, Alex you mentioned that you thought that would be a material percentage of new writings on that relationship in a Q1 any more detail you can just give in terms of premium expected there and how we should think about the growth.

From that relationship throughout 2020 tailwind even beyond.

Yes, thank you for that question.

We're still in the early days on Carvana, we're seeing really.

Citing growth through that channel and we are seeing a material portion to day of our new writings coming through that channel.

We have lots of plans to continue to scale, both the state footprint as well as continue to drive up the attach rate with customers through our.

The version two of our product that will be more embedded.

Into the carvana flow than what what currently stands.

Dan do you want to comment on expectations.

I think.

Good morning.

I think the only thing I'd add to what Alex said is yes.

A lot of people talk about partnerships that can be an overused word I think one of the things. We're most excited about in the six months since we agreed to our partnership with Carvana and their investment in route.

Is how quickly the teams have come together. This is really a very special and unique partnership we've seen like minded cultures, we've seen laser focus on the customer that we both share really really open collaboration between the companies and simply put thats driving faster development of the embedded.

<unk>.

Stay tuned for what's to come but we're very excited about it.

Okay. Thank you.

Thank you. Our next question comes from Josh <unk> of Cantor Fitzgerald. Your line is open.

Yes, hi, Thanks for taking my question I wanted to dive into your policies in force, which grew year over year, but yes.

Q, what hope do you still game users.

<unk>.

Yes, I think Thats a great question for Dan on policies enforcing growth, yes, I think look we were pleased with the performance in the fourth quarter.

Particularly seen retention at better levels than we anticipated.

As well as some of the hangover of the marketing that we had invested in earlier in the year that said, we do we are continuing to guide with language that we used in the last quarter about significant year over year declines in growth as we go forward for the first half of the year you know the first half of 2002.

One was a really significant growth period for us.

And as we lap that we want to remain really laser focused in this environment on our pricing and underwriting really focused on the foundation of the business, what we've talked about and it's reflected in our results from the fourth quarter that we are having success. The actions that we took in the middle of 2021, leveraging the technology that we have in place.

To drive a really granular focus on pricing and underwriting and frankly to move faster and youre going to start to see that show up in the results as you did in the fourth quarter on the bottom line at the same time, we're focused on differentiated more efficient customer acquisition channels and for us that starts with Carvana. So it's less.

<unk> growth this month and month and its more as Alex said earlier about building towards that on that path to profitability and that's what we're excited that's the journey we're on.

Great. That's helpful and following along that line of thought with Carvana, becoming a material part of the writing starting in <unk> do you also expect it to start having a positive impact on your loss ratio for the airplane.

For the full year.

I think Matt <unk>.

<unk> can talk about what we're seeing through that channel to date, it's still very early days, but we are seeing positive signs Matt do you want to give some detail I do want to underscore. The fact that it's very early days and the losses are still developing but we are seeing encouraging signs.

Not just from the customer mix characteristics and the retention data that we're seeing but also early indicators of frequency and loss ratio. It's important to note that anytime you start a new channel you will feel a new business impact from that channel, but when we compare and control for that back the early signs are very encouraging.

Great. Thank you very much.

Thank you. Our next question comes from Matt <unk> of JMP. Your line is open.

Hey, Thanks, good morning.

Taking your kind of comments on pricing action, what you've seen with frequency.

And then also the commentary in the letter about being able to kind of see loss trends more quickly do your technology and react to them.

Do you think it's safe to say you knowing what you know today that we have seen the worst of the loss ratio and then I heard your comments about improvement in the loss ratio in 'twenty, two but given the stability Q4 versus Q3 do you think we peaked out or are there reasons to believe that we could take higher before seeing that improvement over the course of the year.

Okay.

I think we've done a lot of work and the teams have done really an amazing job of getting both the underwriting.

Our underwriting function improved pretty drastically as well as pushing out.

A ton of pricing improvements throughout all of our markets and so we've done really a historic amount of work over the last six months to really control for that and we're really proud of the team and the hard work they've put in there I'm going to pass it over to Frank who can talk a little bit more about how we see the future.

Yes, so it's fun to talk about the future.

I want to break your question up into kind of there is loss trend and then there is loss ratio trends.

We do think that loss trends are still high.

As we look at the macroeconomic factors inflation is still up used car prices are still up and we expect that a lot of those.

Macro economic.

Impacts to still remain high and to have relatively high high loss trends throughout the rest of this year at least throughout the rest of this year now than there is loss ratio trend now we think that we managed to take actions.

Very early on as we started to see these loss trends come up and so our rate actions our underwriting actions.

Should help bring that loss ratio down or at least.

Keep pace with that trend and so while we might not have seen the peak in loss trends are.

Your industry wide macroeconomic loss trends, we do think that we've probably seen a peak in the loss ratio trend.

Great. That's very helpful. And then one other if I could.

A high level question, but I think one that.

People might find pertinent given kind of some of the changes taking place.

What does it look like two to three years from now and specifically I'm kind of asking around you know kind of distribution makeup of the company.

And path to profitability.

This is Alex thanks for that question yet.

What we see right now and where we're still laser focused as we have not lost belief at all in really the core underlying opportunity here and we still think that when you look at the 260 over 260 billion auto insurance market that we have developed a really differentiated technology, both in our ability to move quick.

<unk> and developed things like Carvana, and even broader embedded platform, where because of our technology, we can deliver one click.

We can deliver one click experiences and at the same time, we can leverage our data to actually materially improve the underlying unit economics, and so I think in the future you're going to see we do believe embedded is a gigantic opportunity. We think that there is going to be a very large shift we think it builds better consumer experience.

<unk> and we think that we're at the tip of that spear.

And we're going to continue to expand that product and distribution line.

We also still believe in our direct channel.

We think that we can build better consumer experiences.

Through our technology and that's what we're going to continue to do and then with that you should expect material improvements to profitability, which is the companys track record, we have consistently improved loss ratio over the years and we saw some inflation last year, but we believe we've now really acting quickly decisively and aggressively to get that back.

Under control.

Great. Thanks for the answers I appreciate it.

Thanks.

Thank you. Our next question comes from Michael Phillips of Morgan Stanley . Your line is open.

Hi, you actually have a smile on tableau on for Mike.

Just have one quick question somewhat touching on that last point that you guys made so as you think about your various distribution channels.

How do you rank.

Slash prioritize IAA channel and I think you touched on and do things that will focus on <unk>, but I'm just trying to figure out how do you balance the various distribution channels include in partnership and not <unk>.

Alluded to somewhat breaking into a channel as well.

And we do have.

Investments throughout multiple distribution channels, including our independent agency channel, which is still live and we are getting policies through that channel today.

However, what we have seen and what we have observed over the last six months with really the.

With the Carvana partnership and the success of the embedded product.

Really surpassed any of our expectations and so what we in the immediate future I really focused on is we think it's very prudent to focus our resources there to continue to drive that growth channel and we also believe that that growth channel.

Actually can create a moat around our business because there is it is differentiated access to customers.

Where we can uniquely service those customers in the moment that they actually have the need and so we think because of that that's really where we're focused right. Now of course as we progress we believe that theres lots of other ways to talk to customers too and so.

We will be over time over a longer period of time continuing.

Continuing to incubate other distribution channels, but right now the focus is carvana.

Great. Thanks, and just a quick question on your rate increases so you've been taken a significant significantly increases I think you guys alluded to in your shareholder letter, 14% since the beginning of 2021, which somewhat seems above the industry average obviously people have been taken a bright spot.

Inflationary pressures, but I'm just trying to figure out what is that a function of that.

No problem I know, what you guys entering new states you Werent allowed to use your telematic pricing. So you have to rely on other previously filed data from other insurers alright.

Is it just like a bunch of your telematics pricing and Youre adjusting for it there.

Is it a different.

And the inflationary environment as well I'm, just trying to parse out what is the difference that would it seems above.

Industry average rate taken throughout the past.

A few months.

Sure. This is Frank I can take that great question.

Make that a lot of that rate increase action over industry average is.

The inflationary pressure right.

So quarter one.

Industry quarter, one of last year, the industry had a very good loss results.

Then quarter two it started to accelerate away and we saw some of that loss cost increases some of the greatest loss cost increases in the last 20 years maybe.

In quarter, two quarter, three and quarter four now we believe that was able to identify that earlier bulk with our using our technology the granular level at which we segment segment level that we look at our loss cost data.

As well as our UBI, giving us more driving information around customer driving patterns and how those are increasing both on a frequency and severity basis and so we think we were able to recognize that industry loss cost trends earlier and start getting those rate increases and underwriting actions in the market faster than what other competitors. So so if you go back to quarter two quarter three.

I think we would've expected that we would have higher than industry average rate increases, mostly because we recognized the loss increases that are impacting us and the industry, but just could act sooner than many of our competitors.

Thank you I appreciate it.

Yes.

Thank you. Our next question comes from Iran.

Your line is open.

Hey, Good morning. This is Andrew on for your own.

So it sounds like retention rates were a bit stronger this quarter, but at the same time, so filing for rate increases I was hoping you could help us think about the impact on retained path and on that new pest growth from here just given the rating actions.

Yes sure this is not an octopus.

Like you said going into Q4 retention was a bit better than we expected we've incorporated that into our forward looking forecast.

That's gone out of our way as we've improved our underwriting and pricing capabilities to pay close attention to the customer experience and that means preserving the rates they get new business as they renew into their future terms. So rate disruption is top of mind and mitigating it for the benefit of the customer is a priority for us so while we do it.

Spec rate increases going forward in the quarters to come to impact retention, we think it won't impact it the same way it has in the past and.

That's incorporated into our shareholder letter and our forward looking forecast.

Great. Thank you and then.

So it sounds like loss trends still expected to be high throughout the rest of the year, but loss ratio trend.

Has peaked.

Just given.

The current inflationary environment does routes still need another level or another round of rate increases.

Yes. This is Frank I would say that we're still in.

In the middle of that first round of rate increases and then we are certainly monitoring and we will see kind of how those loss trends increase. So you don't have to take all of the rate.

In one month January and February and so we're continuing to take rate and expect to continue to do that for the next couple of months and then we will see and we're past we're positioned to be able to take further rate than the rest of this year, if we need to.

Great. Thank you.

Thank you. Our next question comes from Mark user choice. Your line is open.

Yes. Thank you good morning.

Your level of sales and marketing spend we should it go from the level you had in Q4.

Good morning, Mark This is Dan.

Alright.

Our on the trajectory of sales and marketing that.

Really talked about back on the Q2 call last summer.

We did a reset around our direct marketing strategy, obviously focused on building out the differentiated embedded insurance products, starting with Carvana and Thats continued we continue to cut back sales and marketing through the third and fourth quarters last year and are continuing to do so as we look at the first half of this year now.

We are continuing to test as Matt talked about earlier.

We leverage the data that we have the customer segmentation information that we have.

We have a very strong new chief marketing officer, BC, silver, who is bringing some differentiated strategies to our direct marketing we were thrilled to hire him from green dot in a lot of other prior experience at Procter and Gamble on Clorox brands than otherwise may have been a great addition is a leader to the team and again, we look forward to.

What he develops strategically that said and the pricing and underwriting environment that Frank and Matt described where we are continuing to take rate and.

With the worst auto insurance inflation and for decades, that's going to necessarily result in lower marketing, we think that is the prudent strategy.

And the smart thing to do right now and then as the strategies that we've put in place that Frank and Mark.

<unk> articulated and that we talked about in our shareholder letter dating back over the last several quarters that are showing up in our results as those strategies are in place then we can return to a greater focus on direct marketing.

Understood.

$25 million level is that a reasonable run rate when we think about the first six months.

2022.

If you are saying $25 million for the first half of the year I actually think Thats high again in this environment.

Where we are able to reduce down our direct marketing spend and focus it on the states and customer segments that matter and until we get the rate increase was in place I think $25 million over a six month period is higher then we will end up.

And then I think you gave a lot of details on this.

Could you talk generally about your resources the cash on hand.

Cash burn just general sense of.

Your current position.

Okay.

Yeah. Thanks, Thanks, again, Mark I'll take that one.

I think we are a fundamentally stronger company with a sound strategy and a stronger balance sheet today.

And then we have been in the past.

That's reflected in the actions that we've taken around sales and marketing that I just described.

Actions from a fixed expense standpoint.

And really from a focus and prioritization within the business. We are just running really strongly at the key priorities, Alex articulated around our pricing and underwriting focus what we call. One play this play because it is really the critical play in the foundation and then building out the differentiated customer.

Acquisition strategy, so that sets us up to have line of sight to profitable unit economics, as we move forward and then capital to execute on our strategic priorities to get us there.

I think the other thing that I would add is the support from Blackrock.

That occurred back in January where we closed the facility.

Sends a very powerful message.

To have Blackrock support us with a five year $300 million debt facility.

Really really exciting for us so.

Where are we where we sat at year end from a holdco cash position, which we felt good about as well as our cash and investments position has only been strengthened by the $300 million facility close with Blackrock in January .

Thank you.

Thank you. Our next question comes from David Mann of Evercore.

Core ISI your line is open.

Thank you.

I just had a question just on the outlook.

So if I if I just think that you think there's going to be a 25% improvement on the operating loss in the first half.

That implies about $100 million of.

Losses operating losses, a quarter you guys were still $92 million this quarter.

You have some expenses that are coming from some of the milestones you took earlier this year.

On Guam in response to a question earlier in the sub market loans down might even come down further.

So you guys have allowed you to know that the operating losses this quarter.

Why do you expect that.

Gary.

So around $100 million a quarter in the first half of the year.

I think.

We caution you David first of all good morning, nice to speak with you again I would caution you from looking at the run rate of the fourth quarter losses, given the seasonality in the business as well as the continued inflationary impact that Frank described earlier.

The factors to just look at one quarter and then extrapolate that into performance for the following year I think if you look at our sales and marketing levels in the fourth quarter. They were quite low that is seasonally typically would be our lowest direct marketing quarter of the year to begin with and it was lower consistent with that so.

We expect that to continue I think for US we as I mentioned earlier, we are running more efficiently today than we have in the past we are focused on our core strategic priorities. That's going to result in about a 25% operating loss improvement and we're trying to smooth out the seasonality that you might see in one quarter or another.

Frankly, just focus on executing on our plan I think what youre seeing from us and the results of that.

We announced in the fourth quarter.

And the plan and focus that we have going forward is it's less about one quarter or what have you. It's really about the strategy that we fundamentally believe and we think as Matt said, we are moving faster than others in the marketplace, you're seeing the impact of our technology and our granular focus showing up in the results.

And that's our focus and we're going to continue to do that as a team.

And look forward to continuing to talk to all of you on that journey.

Got it okay. So I guess your seasonality must be a little bit different I guess some of your peers are a little bit favorable seasonality in <unk> versus <unk>.

That's fair.

Okay.

And then if I.

You just mentioned in the letter.

Alex just around the corner.

Regarding our relationship you talked about some of the metrics around loss ratio attachment attach rate.

Looking positive on some of that business through Carvana.

You just saw what those metrics are.

And I am specifically focused on what the conversion ratio is for the Carvana relationship.

How thats looking.

Just just to get a sense for.

As you guys expand how to think about that.

Yes. This is Dan.

We've talked about it we're really excited about where carvana.

And again I think it's it's all developing faster than we anticipated and better than we anticipated, but it is still early days and Matt talked about it earlier.

We're working really really well as partners and learning from the early signs that we see in the data and we'll look forward to sharing more in the quarters ahead.

Leading indicators that we do see support better unit economics coming from the channel and a better customer experience and now it's about continuing to develop the product add more states learn from the testing refine and grow the channel.

Thank you.

Thank you. Our next question comes from Brian Meredith UBS. Your line is open.

Yes. Thanks, a couple of them here first just curious Dan I think you mentioned that the loss ratio had 6% severity in it as a little surprised at that number given that most of your competition in most of the personal auto carriers had double digit severity in the quarter is there something unique about route that makes you have lower severity than the comp.

Petition and is that what you're assuming from a pricing perspective, 6% right now and that was I guess assume built into your reserving for the quarter as well.

Hi, This is Frank I would say that when you think about the pricing right to your pricing question.

We look at frequency and severity in overall loss trends not just the severity. So I do think that.

On an annual basis.

Year over year or quarter over quarter, you might see higher than 6% overall, we're expecting probably higher than 6% overall loss trends.

And I will say too with our claims functionality, particularly.

All of our claims systems, our in house and so when we see things like used car price increase.

Increase.

Can very easily and quickly actually mitigate a lot of that by making sure that we're totally in fewer vehicles and beginning to actually move more into into repairs and so we were able to make that shift actually.

Real time, because we have a data science model that effectively.

Signs of threshold that allows us to basically decide whether or not we repair a vehicle or total vehicle and we can do that honestly on a day by day basis, and so as we've seen.

<unk> severity increase we've.

We've been able to actually change the.

The logic on our on our claims handling which is we believe very unique in the industry.

Great. Thanks, and then second question.

Just quickly back on cash burn.

I'm just curious as I look at kind of near term cash burn given the big drop youre going to see written premium in the first half of the year is that all it all kind of maybe increased cash burn a little bit in the near term ultimately obviously to improve as the book.

Bruce.

Okay.

Yes, we don't anticipate that drop off in new business too.

Alright materially increase cash burn in fact, we think the opposite will occur because new business typically with a higher first term loss ratio causes causes a bit of a strain on on cash burn and so we've cut our operating loss.

Roughly in half in the last six months or so.

And we think that that's going to continue.

Great Great and then if I could just one quick last one the carvana relationship I'm, just curious is that a telematics product.

So what we've done in the.

In the first version of Carvana is we've really prioritized getting a product out into the market into consumers' hands and moving quickly and.

And Thats the way, we like to develop products that route as we really leverage our engineering abilities to ship product very quickly very very frequently and so every week, we are making improvements to that to that.

That product flow currently we are not using telematics in the Carvana flow. However, we do have plans tail and.

And we think that Theres a lot of really interesting opportunities here, particularly given that they have the vehicle really in their possession.

Which allows us to get closer to vehicle technology as well, while they're in the reconditioning centers and so.

That is certainly on our product roadmap and we will be iterating quickly and inform you guys as we've all those new products out.

Thanks I appreciate it.

Thank you. Our next question comes from Tracy <unk> of Baird.

Barclays. Your line is open.

Good morning, I'm trying to rectify your eight rate increase action in the fourth quarter and your average premium so I see your premiums per policy only increased 2% in the fourth quarter versus the third quarter. So should I expect it just a time lag thing it will take more time to recognize under the pricing action.

You've taken in your average premium.

Yes. This is Jeremy thanks, Great question.

Hi, Dan go ahead, Frank I was going to say, yes, I'm going to say that one yes, certainly earned premium will take longer to earn in but I'd also say that with some of our marketing actions and the slowing down we've also had mix shifts.

From new to renewal and others. So just looking at the average premium I think is hard to reconcile between filed rate increase.

Average earned premium just because of there are mix shifts. So you could get a mix shift towards a lower earned premium, but a better loss ratio as youre going from new to renewal also.

Okay, and then just staying on rate actions I was actually struck by at 56, 4% rate request in Nevada.

Posing a historic adjustment and to better reflect loss trend.

Trying to fix an expense load how do you think that will respond to that and should we expect any other historical gasoline and other SEC filings.

This is this is Alex that's a good question.

We have one we always are working with the regulators and we are continuing to work with regulators through our state filing process. I think it's important to note that now that the industry has sort of come along and realized that this loss trend is real is that we are not really alone in requesting.

Large rate increases and so I.

I think that that that that that has helped us considerably and we have been able to and I think the track record shows now.

Actually receive approval of our rate increases we've gotten many very large rate increases and changes in market over the last six months and we think that that's going to continue.

The other thing Thats really important for us and why we're able to do this is because we.

We have automated almost all of the actuarial.

Impact analyses that we need to show in the data that we need to support those rate filing increases and so so long as we can show that these are actuarially justified rates, which they are we have all of the belief in the world that will be able to get the rate increases as we've shown in the past.

Okay.

And if I could just sneak something else you mentioned nine points of frequency and claim severity in the fourth quarter, if I compare that to last quarter. You also said nine points of frequency and.

The severity.

Seems like frequency flat not better so when you talk about frequency being better is that a seasonality.

<unk> perspective, and it also seems like severity is getting bigger in what is really driving that given your other comments that inflation.

That should impact results.

Yes.

The not the frequency in the shareholder letter it was really talking about the very end of Q4 going into the seasonal decline in mileage at the end of December and more specifically and into the winter months, that's what drove the decrease in frequency in the quarter overall.

Severity trends are more or less stayed flat basically natural variation quarter over quarter, we havent seen the inflationary pressures stack on top of each other quarter over quarter and that allows us to be confident in the rate filings that we're going forward with to date.

Oh Oh Paul.

My comment was more of the end of the quarter, but it was still flat nine points versus nine point trip frequency and more.

Just variability quarter by quarter.

<unk> six point, the severity versus eight point last quarter is that right.

Yes.

I think that's correct youre going to see some variability when we look at year over year.

Trends in severity and frequency.

Particularly on severity it can be noisy so I would say that Thats correct and then we are seeing seasonal benefits to frequency.

Okay.

Thank you.

Question comes from Ryan Tunis of autonomous.

Research Your line is open.

Sure.

Thanks, Good morning.

As best you guys can tell what do you think your cash position will be at the end of 2022.

Thanks, Ryan I appreciate the question I'm, not I'm not going to get into specifics on that you see especially given the.

The environment that we're in we're excited about is a couple of things. We're excited about the fact that over the last couple of quarters.

We have hit our stride from a strategic standpoint, as well as an operating standpoint, Alex talked about the significant reductions in sales and marketing expense the fixed expenses et cetera, and we're forecasting a 25% operating loss improvement year over year for the first half of the year and as I said earlier.

We're really pleased that we see line of sight to profitable unit economics that will help protect the cash position that we're in.

And we have capital to execute on the strategic priorities that we've laid out part of being more focused from a prioritization perspective.

It certainly allows us to benefit from the capital position that we're in and extend out to cover the priorities that we're focused on on top of that I mentioned earlier, the Blackrock facility, which has a five year $300 million facility that closed in January .

Really really important and gives us the foundation and the support to continue to execute on our strategy for years to come.

Yeah.

Got it.

And then a follow up for Alex.

I mean, a lot of point guards has actually won the MVP.

You guys have actually shown you have a lot of marketing acumen, you've shown a ton of policies will be lifetime.

Decent tech stack as well.

And seemingly if you were to run more of a tech light model you could do it with.

A lot less G&A is there any thinking.

Have you guys thought at all about perhaps pivoting your model and trying to monetize it in a different way or is that something you would consider.

Over the next six months or so.

Yes.

If the insurance environment is still complicated.

We think that our technology as we said before as is.

Extremely differentiated and we have seen that.

When it comes to Carvana for example.

We've said there are several states that we know we don't support right now.

And what we've seen is that.

Attractive business.

And that there are definitely other partners potential balance sheet partners.

Or that are interested and are leaning in to potentially partner with US now what I will say is that when we're looking at those partners and when we're considering this as it is very important to us that they can maintain the customer experience that we're building.

So making sure that they can leverage our technology and sufficiently provide that level of customer adoption and experience is going to be really important.

We have had an enterprise program in place to for a couple of years now and so.

Those business model changes.

And the different various business models to capitalize on our core technology assets that we have built here.

Definitely something that we're exploring and honestly have explored and we have.

Real real progress to show to date.

We already have for instance, too.

Major insurance carriers that we partner with.

In order to broker business. So we certainly look at that.

Thank Ryan this is Dan the only thing I would add is.

The industry has taken note of our ability to leverage our technology. During this very unique environment and you can imagine that we have gotten significant communication on that because of the results speak for themselves and that's only reinforced by the results we posted for the fourth quarter, we're always going to look at opportunities.

And some of the strategic choices that we have in front of us and again, we're excited about being at this point in the journey and some of the things that are going to develop in the quarters ahead.

Thanks.

Thank you.

Showing no further questions at this time, ladies and gentlemen. This does conclude today's conference. Thank you all for participating you may all disconnect have a great day.